Money World Goes Boom
The death of ZIRP.
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1. RIP ZIRP
Sometimes I think this newsletter is actually a piece of advanced technology which functions as a portal to the future.
I was warning the Biden administration about inflation in February of 2021.
And after the Fed meeting in May I wrote the following:
Here’s the money quote from the Fed chair, Jerome Powell:
"A 75 basis point increase is not something the committee is actively considering," Powell told reporters. "If inflation comes down we're not going to stop, we're just going to go down to 25 basis point increases," he added.
Allow me to translate what “not actively considering” means:
Warning: A 75 basis point increase is absolutely something we might do at the next meeting. Even if inflation slows, we may increase by another 50 basis points next time. And everyone should price in a quarter point increase at the next meeting just as a baseline expectation.
The market disagreed with me and so everyone lost their minds yesterday when the Fed did, in fact, raise rates three-quarters of a point, the biggest hike in 28 years.
Here’s another report from the future: More is coming; ZIRP is dead.
ZIRP—zero interest-rate policy—has been the fundamental fact undergirding the last decade or so of American life. Free money impacted everything, from real estate to the stock market, to energy, to technology, to politics.
Maybe ZIRP wasn’t a crazy idea from the start, but the Fed’s decision to treat it as a mode of living and not an emergency tool, warped American life in ways which are going to be unpleasant to unwind.
For instance: The odds of the housing bubble popping are pretty good right now. Tech world is undergoing a huge correction as cash-burning companies from Uber to Netflix have to rationalize their businesses. And with the bond markets coming back, money is likely to flow out of the stock market.
On top of this, we have an energy crisis that can’t be resolved until Russia’s war against Ukraine is resolved.
And then there’s crypto.
Crypto was another downstream product of ZIRP, because with interest rates at zero, dollars went chasing any sort of return they could find, no matter how risky and/or ridiculous it was.
Which is why $3 trillion flowed into pretend digital assets. And the total market cap of “crypto” right now is below $1 trillion.
What has happened to crypto over the last few weeks looks a little bit like the Bear Stearns - Lehman collapses of 2008. Except that in crypto, there’s no government to bail the system out.